Governments Make Lousy Traders

Investment banks, not Vincent Cable, should carry the can for the "significant value" that the committee says U.K. taxpayers missed out on in the Royal Mail IPO.
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One of the Britain's most capable officials is under fire after a parliamentary reviewof the U.K. government's sale of Royal Mail Plc decided he screwed up. Those accusing fingers, though, should be pointed at the banks who advised on the privatization, rather than the government's business secretary, Vincent Cable. Moreover, they should be made to hand back at least part of the 10.3 million pounds ($17.6 million) they earned in fees for mismanaging the sale.

The government sold Royal Mail in October at 330 pence a share, raising 1.7 billion pounds. The shares immediately went on a tear; today, they trade at about 480 pence, giving the postal company a market value of about 4.8 billion pounds. The banks that handled the IPO were Goldman Sachs, UBS, Barclays and Merrill Lynch, with Investec, Nomura and RBC Europe as lead managers. Lazard advised the government.

The real question is how did these banks and the brilliant people who work at them get the IPO pricing so wrong? Every newly public company -- along with investors who buy the shares -- wants to see the stock rise after it starts trading. But to misjudge the potential for appreciation by a factor of almost 50 percent in less than a year after the offering demands some kind of explanation.

The Business Committee has made a decent effort at providing one. "Fear of failure and poor quality advice led to a significant underestimate of the demand for Royal Mail shares," the committee said in a statement today.

Royal Mail was the biggest share sale in Europe since April 2011, when Glencore Xstrata raised $10 billion. Maybe it's understandable that after such an extended period of time with not much to practice on there was a fear of failure. It's the second part of the committee's accusation -- the chastising of Cable -- that should receive more attention because it is largely misplaced.

Cable is not only a hugely experienced politician who's been in Westminster since 1997, he also knows his way around a spreadsheet. As a graduate, he worked at the Kenyan government's treasury; he was a special adviser on economic affairs to the Commonwealth Secretary in the 1980s, and became chief economist at Royal Dutch Shell in the 1990s.

Even that resume, though, provides nothing like the experience needed to judge investor demand for shares in a company such as Royal Mail, whose key business of delivering letters has been destroyed by e-mail; whose parcel-delivery revenue could disappear overnight if Amazon and other Internet retailers build their own logistics businesses; and whose workers are among the most enthusiastic in the country for going on strike.

That's why all those shiny investment banks were hired -- for their alleged deal-making expertise. In the nine months leading up to the Royal Mail sale, Goldman alone handled more than 200 deals worth $440 billion, according to data compiled by Bloomberg; the other three bookrunners shared almost a trillion dollars of business in almost 400 transactions. They, not Cable, should be taken to task for the "significant value" that the committee says U.K. taxpayers missed out on.

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